Guest Post: Dividends

Hello, everyone! Today we’re going to hear from Chris Pascale, who is going to talk about dividends. It’s always a pleasure to have you here, Chris! Take it away:

Dividends: When Your Money Makes You Money

As noted in my posts about The Gap and Starting a Roth at 15, my financial writing tends to center around my kids being better off than I am. This piece will be no different.

Over the years, my daughters have built up passbook savings accounts with money received from relatives on birthdays and holidays. When they make deposits, the interest that accumulates can be seen, often between 1 and 5 cents a month.

As we’ve viewed the interest, I always point out that by having money, they are getting more money.

My older children are now learning about stocks, bonds, and real estate investing. Among the things we discuss is the value of getting dividends.

What Is A Dividend?

Some companies divide up profits at the end of a financial period and pay that money to shareholders.

Divided at the End = Dividend

Are Dividends Better Than Interest?

Dividends are generally better than interest because they are attached to a security that can go up in value. Cash in the bank can only lose value against inflation. While stocks have a risk of loss, cash guarantees it.

Also, dividends are almost always higher than the interest you can earn these days, even on a current CD or bond. There may be some CDs and bonds earning more interest, but the capital is then tied up for an extended period of time. Contrastingly, you can sell the dividend-paying stock anytime you want.

This does not mean that stocks are better than bonds and CDs, but they are different, and those differences need to be understood.

Dividend Example

This year, I bought some shares of General Electric (GE) that I intend to hold for a long time, and acquire more of. I bought 35 shares at the start of the year, and another 25 shares this week. My overall investment is down, but I like GE for the following reasons:

They make quality products I use.

They are a solid American manufacturer.

The stock appears to be on sale, having dropped 25% in the past few months.

The dividends are reliable.

GE is not a stock you can get rich with by buying $1,000 worth. For such ventures, you might consider Hemp, Inc. or other pot stocks, of which I own over 300,000 shares and would like to buy 300,000 more. What GE is, though, is a stock you might be able to double your money with over the next 10 years while being paid dividends along the way.

Earnings on GE Dividends

GE is paying dividends of roughly 3%. This means that owning $1,000 worth will bring you $30 in cash. If you were to slowly add shares to your investment over the next 20 years (not making GE your only investment, of course), it would not be unreasonable to see your investment grow to $50,000.

That base of $50,000 would be paying dividends of $1,500 a year, if they only paid out once a year.

If you had 10 other dividend-paying stocks, then a portion of your retirement income would be $15,000 in dividends.

Reviewing Retirement

$15,000 is not going to cut it if you want to retire well. That’s why it’s such a shame when an older person only has Social Security to rely upon. Let’s review what your retirement will look like with dividend income. This may be very modest because it assumes no rental real estate, spouse’s retirement, or valuable collectibles.

Assets at 60 years old:

Personal residence: $250,000

Retirement account: $700,000

Stock account: $500,000

Total assets: $1,450,000

Income at 60 years old (working for pleasure, part-time):

Job income: $20,000

4% retirement draw: $28,000

Dividend income: $15,000

Total income: $63,000

As noted, this assumes that only one person in the home worked, so there is only one retirement account and there will be only one Social Security income later on, which will add at least $20,000 to the total income when drawn upon.

What is important to note is the difference this dividend income makes. Going from $48k to $63k is still on the spectrum of middle class comfort for those who have unburdened themselves of the shackles of a home mortgage and car loan payments, but it’s a big difference. It can allow for important home improvements to be made. A couple can go on a very nice vacation, or they can comfortably give a loved one in need as much as $2,000 without feeling as though they are making a great sacrifice.

Lastly, the dividends come from a base amount of capital that is worth $500,000, which can go up, but even if it went down, the value of having gotten paid for years will equal a net gain.